Open AccessThe Euler equation with habits and measurement errors: Estimates on Russian micro data
Author(s) -
Irina Khvostova,
Alexander Larin,
Anovak
Publication year - 2016
Publication title -
panoeconomicus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.289
H-Index - 14
eISSN - 2217-2386
pISSN - 1452-595X
DOI - 10.2298/pan1604395k
Subject(s) - dynamic stochastic general equilibrium , econometrics , multiplicative function , generalized method of moments , bayesian probability , mathematics , euler equations , panel data , lagrange multiplier , estimation , economics , statistics , mathematical optimization , mathematical analysis , monetary policy , management , monetary economics
This paper presents estimates of the consumption Euler equation for Russia. The estimation is based on micro-level panel data and accounts for the heterogeneity of agents’ preferences and measurement errors. The presence of multiplicative habits is checked using the Lagrange multiplier (LM) test in a generalized method of moments (GMM) framework. We obtain estimates of the elasticity of intertemporal substitution and of the subjective discount factor, which are consistent with the theoretical model and can be used for the calibration and the Bayesian estimation of dynamic stochastic general equilibrium (DSGE) models for the Russian economy. We also show that the effects of habit formation are not significant. The hypotheses of multiplicative habits (external, internal, and both external and internal) are not supported by the data